diff --git a/Jakefile.js b/Jakefile.js
index 2f0ce4aa399cd..c4f56c559f364 100644
--- a/Jakefile.js
+++ b/Jakefile.js
@@ -153,7 +153,8 @@ var harnessSources = harnessCoreSources.concat([
     "tsconfigParsing.ts",
     "commandLineParsing.ts",
     "convertCompilerOptionsFromJson.ts",
-    "convertTypingOptionsFromJson.ts"
+    "convertTypingOptionsFromJson.ts",
+    "tsserverProjectSystem.ts"
 ].map(function (f) {
     return path.join(unittestsDirectory, f);
 })).concat([
diff --git a/src/server/editorServices.ts b/src/server/editorServices.ts
index 5502f74408e03..8eae43b503d3f 100644
--- a/src/server/editorServices.ts
+++ b/src/server/editorServices.ts
@@ -1138,7 +1138,7 @@ namespace ts.server {
             else {
                 this.log("No config files found.");
             }
-            return {};
+            return configFileName ? { configFileName } : {};
         }
 
         /**
diff --git a/tests/cases/unittests/tsserverProjectSystem.ts b/tests/cases/unittests/tsserverProjectSystem.ts
new file mode 100644
index 0000000000000..c69821ced5f98
--- /dev/null
+++ b/tests/cases/unittests/tsserverProjectSystem.ts
@@ -0,0 +1,294 @@
+/// <reference path="..\..\..\src\harness\harness.ts" />
+
+namespace ts {
+    function notImplemented(): any {
+        throw new Error("Not yet implemented");
+    }
+
+    const nullLogger: server.Logger = {
+        close: () => void 0,
+        isVerbose: () => void 0,
+        loggingEnabled: () => false,
+        perftrc: () => void 0,
+        info: () => void 0,
+        startGroup: () => void 0,
+        endGroup: () => void 0,
+        msg: () => void 0
+    };
+
+    const { content: libFileContent } = Harness.getDefaultLibraryFile(Harness.IO);
+
+    function getExecutingFilePathFromLibFile(libFile: FileOrFolder): string {
+        return combinePaths(getDirectoryPath(libFile.path), "tsc.js");
+    }
+
+    interface FileOrFolder {
+        path: string;
+        content?: string;
+    }
+
+    interface FSEntry {
+        path: Path;
+        fullPath: string;
+    }
+
+    interface File extends FSEntry {
+        content: string;
+    }
+
+    interface Folder extends FSEntry {
+        entries: FSEntry[];
+    }
+
+    function isFolder(s: FSEntry): s is Folder {
+        return isArray((<Folder>s).entries);
+    }
+
+    function isFile(s: FSEntry): s is File {
+        return typeof (<File>s).content === "string";
+    }
+
+    function addFolder(fullPath: string, toPath: (s: string) => Path, fs: FileMap<FSEntry>): Folder {
+        const path = toPath(fullPath);
+        if (fs.contains(path)) {
+            Debug.assert(isFolder(fs.get(path)));
+            return (<Folder>fs.get(path));
+        }
+
+        const entry: Folder = { path, entries: [], fullPath };
+        fs.set(path, entry);
+
+        const baseFullPath = getDirectoryPath(fullPath);
+        if (fullPath !== baseFullPath) {
+            addFolder(baseFullPath, toPath, fs).entries.push(entry);
+        }
+
+        return entry;
+    }
+
+    function sizeOfMap(map: Map<any>): number {
+        let n = 0;
+        for (const name in map) {
+            if (hasProperty(map, name)) {
+                n++;
+            }
+        }
+        return n;
+    }
+
+    function checkMapKeys(caption: string, map: Map<any>, expectedKeys: string[]) {
+        assert.equal(sizeOfMap(map), expectedKeys.length, `${caption}: incorrect size of map`);
+        for (const name of expectedKeys) {
+            assert.isTrue(hasProperty(map, name), `${caption} is expected to contain ${name}, actual keys: ${getKeys(map)}`);
+        }
+    }
+
+    function checkFileNames(caption: string, actualFileNames: string[], expectedFileNames: string[]) {
+        assert.equal(actualFileNames.length, expectedFileNames.length, `${caption}: incorrect actual number of files, expected ${JSON.stringify(expectedFileNames)}, got ${actualFileNames}`);
+        for (const f of expectedFileNames) {
+            assert.isTrue(contains(actualFileNames, f), `${caption}: expected to find ${f} in ${JSON.stringify(actualFileNames)}`);
+        }
+    }
+
+    function readDirectory(folder: FSEntry, ext: string, excludes: Path[], result: string[]): void {
+        if (!folder || !isFolder(folder) || contains(excludes, folder.path)) {
+            return;
+        }
+        for (const entry of folder.entries) {
+            if (contains(excludes, entry.path)) {
+                continue;
+            }
+            if (isFolder(entry)) {
+                readDirectory(entry, ext, excludes, result);
+            }
+            else if (fileExtensionIs(entry.path, ext)) {
+                result.push(entry.fullPath);
+            }
+        }
+    }
+
+    class TestServerHost implements server.ServerHost {
+        args: string[] = [];
+        newLine: "\n";
+
+        private fs: ts.FileMap<FSEntry>;
+        private getCanonicalFileName: (s: string) => string;
+        private toPath: (f: string) => Path;
+        readonly watchedDirectories: Map<{ cb: DirectoryWatcherCallback, recursive: boolean }[]> = {};
+        readonly watchedFiles: Map<FileWatcherCallback[]> = {};
+
+        constructor(public useCaseSensitiveFileNames: boolean, private executingFilePath: string, private currentDirectory: string, fileOrFolderList: FileOrFolder[]) {
+            this.getCanonicalFileName = createGetCanonicalFileName(useCaseSensitiveFileNames);
+            this.toPath = s => toPath(s, currentDirectory, this.getCanonicalFileName);
+
+            this.reloadFS(fileOrFolderList);
+        }
+
+        reloadFS(filesOrFolders: FileOrFolder[]) {
+            this.fs = createFileMap<FSEntry>();
+            for (const fileOrFolder of filesOrFolders) {
+                const path = this.toPath(fileOrFolder.path);
+                const fullPath = getNormalizedAbsolutePath(fileOrFolder.path, this.currentDirectory);
+                if (typeof fileOrFolder.content === "string") {
+                    const entry = { path, content: fileOrFolder.content, fullPath };
+                    this.fs.set(path, entry);
+                    addFolder(getDirectoryPath(fullPath), this.toPath, this.fs).entries.push(entry);
+                }
+                else {
+                    addFolder(fullPath, this.toPath, this.fs);
+                }
+            }
+        }
+
+        fileExists(s: string) {
+            const path = this.toPath(s);
+            return this.fs.contains(path) && isFile(this.fs.get(path));
+        };
+
+        directoryExists(s: string) {
+            const path = this.toPath(s);
+            return this.fs.contains(path) && isFolder(this.fs.get(path));
+        }
+
+        getDirectories(s: string) {
+            const path = this.toPath(s);
+            if (!this.fs.contains(path)) {
+                return [];
+            }
+            else {
+                const entry = this.fs.get(path);
+                return isFolder(entry) ? map(entry.entries, x => getBaseFileName(x.fullPath)) : [];
+            }
+        }
+
+        readDirectory(path: string, ext: string, excludes: string[]): string[] {
+            const result: string[] = [];
+            readDirectory(this.fs.get(this.toPath(path)), ext, map(excludes, e => toPath(e, path, this.getCanonicalFileName)), result);
+            return result;
+        }
+
+        watchDirectory(directoryName: string, callback: DirectoryWatcherCallback, recursive: boolean): DirectoryWatcher {
+            const path = this.toPath(directoryName);
+            const callbacks = lookUp(this.watchedDirectories, path) || (this.watchedDirectories[path] = []);
+            callbacks.push({ cb: callback, recursive });
+            return {
+                referenceCount: 0,
+                directoryName,
+                close: () => {
+                    for (let i = 0; i < callbacks.length; i++) {
+                        if (callbacks[i].cb === callback) {
+                            callbacks.splice(i, 1);
+                            break;
+                        }
+                    }
+                    if (!callbacks.length) {
+                        delete this.watchedDirectories[path];
+                    }
+                }
+            };
+        }
+
+        watchFile(fileName: string, callback: FileWatcherCallback) {
+            const path = this.toPath(fileName);
+            const callbacks = lookUp(this.watchedFiles, path) || (this.watchedFiles[path] = []);
+            callbacks.push(callback);
+            return {
+                close: () => {
+                    const i = callbacks.indexOf(callback);
+                    callbacks.splice(i, 1);
+                    if (!callbacks.length) {
+                        delete this.watchedFiles[path];
+                    }
+                }
+            };
+        }
+
+        // TOOD: record and invoke callbacks to simulate timer events
+        readonly setTimeout = (callback: (...args: any[]) => void, ms: number, ...args: any[]): any => void 0;
+        readonly clearTimeout = (timeoutId: any): void => void 0;
+        readonly readFile = (s: string) => (<File>this.fs.get(this.toPath(s))).content;
+        readonly resolvePath = (s: string) => s;
+        readonly getExecutingFilePath = () => this.executingFilePath;
+        readonly getCurrentDirectory = () => this.currentDirectory;
+        readonly writeFile = (path: string, content: string) => notImplemented();
+        readonly write = (s: string) => notImplemented();
+        readonly createDirectory = (s: string) => notImplemented();
+        readonly exit = () => notImplemented();
+    }
+
+    describe("tsserver project system:", () => {
+        it("create inferred project", () => {
+            const appFile: FileOrFolder = {
+                path: "/a/b/c/app.ts",
+                content: `
+                import {f} from "./module"
+                console.log(f)
+                `
+            };
+            const libFile: FileOrFolder = {
+                path: "/a/lib/lib.d.ts",
+                content: libFileContent
+            };
+            const moduleFile: FileOrFolder = {
+                path: "/a/b/c/module.d.ts",
+                content: `export let x: number`
+            };
+            const host = new TestServerHost(/*useCaseSensitiveFileNames*/ false, getExecutingFilePathFromLibFile(libFile), "/", [appFile, moduleFile, libFile]);
+            const projectService = new server.ProjectService(host, nullLogger);
+            const { configFileName } = projectService.openClientFile(appFile.path);
+
+            assert(!configFileName, `should not find config, got: '${configFileName}`);
+            assert.equal(projectService.inferredProjects.length, 1, "expected one inferred project");
+            assert.equal(projectService.configuredProjects.length, 0, "expected no configured project");
+
+            const project = projectService.inferredProjects[0];
+
+            checkFileNames("inferred project", project.getFileNames(), [appFile.path, libFile.path, moduleFile.path]);
+            checkMapKeys("watchedDirectories", host.watchedDirectories, ["/a/b/c", "/a/b", "/a"]);
+        });
+
+        it("create configured project without file list", () => {
+            const configFile: FileOrFolder = {
+                path: "/a/b/tsconfig.json",
+                content: `
+                {
+                    "compilerOptions": {},
+                    "exclude": [
+                        "e"
+                    ]
+                }`
+            };
+            const libFile: FileOrFolder = {
+                path: "/a/lib/lib.d.ts",
+                content: libFileContent
+            };
+            const file1: FileOrFolder = {
+                path: "/a/b/c/f1.ts",
+                content: "let x = 1"
+            };
+            const file2: FileOrFolder = {
+                path: "/a/b/d/f2.ts",
+                content: "let y = 1"
+            };
+            const file3: FileOrFolder = {
+                path: "/a/b/e/f3.ts",
+                content: "let z = 1"
+            };
+            const host = new TestServerHost(/*useCaseSensitiveFileNames*/ false, getExecutingFilePathFromLibFile(libFile), "/", [ configFile, libFile, file1, file2, file3 ]);
+            const projectService = new server.ProjectService(host, nullLogger);
+            const { configFileName, configFileErrors } = projectService.openClientFile(file1.path);
+
+            assert(configFileName, "should find config file");
+            assert.isTrue(!configFileErrors, `expect no errors in config file, got ${JSON.stringify(configFileErrors)}`);
+            assert.equal(projectService.inferredProjects.length, 0, "expected no inferred project");
+            assert.equal(projectService.configuredProjects.length, 1, "expected one configured project");
+
+            const project = projectService.configuredProjects[0];
+            checkFileNames("configuredProjects project, actualFileNames", project.getFileNames(), [file1.path, libFile.path, file2.path]);
+            checkFileNames("configuredProjects project, rootFileNames", project.getRootFiles(), [file1.path, file2.path]);
+
+            checkMapKeys("watchedFiles", host.watchedFiles, [configFile.path, file2.path, libFile.path]); // watching all files except one that was open
+            checkMapKeys("watchedDirectories", host.watchedDirectories, [getDirectoryPath(configFile.path)]);
+        });
+    });
+}
\ No newline at end of file